In a vast majority of developing countries, and even developed countries for that matter, the rural economy is largely composed of agriculture and allied activities. This implies that a majority of the rural population gets its livelihood from the agricultural sector.

Agricultural production on land is commonly a familial job, where all members of the family are usually employed on their own farms. Given the rapidly growing population, combined with slow industrial growth, it is natural for people to rely on their own land for employment. However, this creates the problem of disguised unemployment.

Disguised unemployment is a situation in which a part of the employed labour does not add any additional value to productivity. This means that a portion of the workforce is effectively redundant, thereby eating into a labour force that could have been employed more effectually in alternate areas. The term disguised unemployment is used to describe the situation because even though people appear to be employed, they are not employed to their full potential, thereby “disguising” the actual level of employment. Removing a part of the labour force from the activity would not reduce the total output.

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In strictly economic terms, disguised unemployment in agriculture results in a situation where, given a set of techniques and productive resources, the marginal productivity of labour remains zero due to overemployment of resources. In other words, additional labour employed beyond a certain level does not increase the total output produced. This problem of overemployed people on a piece of land arises due to the non-availability of alternate forms of employment in other sectors of the economy.

For instance, in a family of ten members, assume all ten are employed in the family farming activity due to lack of opportunities elsewhere. If the output of farmed produce remains the same if three people stop contributing to the production, then the three people are disguisedly employed. This means that the three who were removed from the farming activity did not effectively contribute to production, or had zero marginal productivity that added to the total output. Thus, the three could be classified as surplus labour from agricultural disguised unemployment.

Labour Vs. Labour Time

This definition of disguised unemployment creating surplus labour was contested by Professor Amartya Sen, who argued that the phenomenon was not essentially a question of the quantity of labour being employed for agricultural production, but the amount of time being spent by each labourer on the activity. “If marginal productivity of labour over a wide range is zero, why is labour being applied at all?” he asked.

With more people being employed for the same amount of output, the total hours worked for each labourer was lesser. Prof. Sen, therefore, established that disguised unemployment led to a smaller number of hours of labour expended by each labourer. “It is not that too much labour is being spent in the production process but that too many labourers are spending it,” he said. The issue was the lack of distinction between labour and labourer, according to him.

Based on the example mentioned before, if three people dropped out of family farm work, then the remaining seven would have to put in additional hours of work to produce the same level of output.

Driving Growth

However, such unemployed people would continue to consume. The employed people in the family, in such cases, would then shoulder the consumption of the unemployed. Since total output would not be altered by the unemployment of the three members on the farm, the family will continue to consume as before.

These unemployed persons will then constitute surplus labour. These people, if not engaged in other activities, would be a wasted source of labour. To counter this problem, Estonian economist Ragnar Nurske suggested that these disguisedly unemployed people should be employed in other capital formation activities such as construction of roads, railways, buildings, irrigation systems, dams, factories etc. When availability of opportunities in agriculture reduces and jobs open up in the capital sector, labour will migrate. This will lead to the formation of capital stock that will reduce the divide between the agrarian and capital economies.

Instead of spending on capital intensive projects, mobilisation of excess labour from the agricultural sector for labour-intensive capital formation would be a cost-effective means of utilisation. “There is the possibility, however, of taking surplus people away from the land. Anything they could produce elsewhere would be a clear addition to the real national income,” said Nurkse.

Since the removal of people from the agricultural sector would not affect the output in any form since their marginal productivity was zero, and their employment in other capital formation activities would ultimately add to the capital stock of the nation, he called this the “Disguised Savings Potential”. Disguised savings potential can propel economic growth in underdeveloped economies.

Deferred Wage Payment

The question that will arise for capital formation is how to compensate the surplus labour for capital formation. This can be tackled through deferred wage payment. Since the surplus labour is deriving its food from its existing family land, payment of wages can be deferred until after the capital stock is completed, which will then generate income for labourers to be compensated. Therefore, the structural problem of surplus labour from agricultural activity self-finances capital formation through a work-sharing and product sharing-system.

Take for instance the People’s Commune system of collectivised agriculture in China in the 1950s, which is an example to illustrate how surplus labour in the rural sector was mobilised to drive industrial production in the nation. Under the leadership of Mao Zedong, agricultural activity was reorganized by the formation of cooperatives, and people’s communes where they voluntarily mobilised for capital formation that would increase productivity. What earlier required more number of people to achieve was the achieved by lesser labour due to the strength of cooperatives. The nation promoted physical capital formation through land reclamation, infrastructure activity, energy generation, rural industries, and building hospitals, schools and sanitation systems.

The industrial labour generated from the surplus of agricultural labour worked on the basis of deferred payment so that the increased capital stock would help improve productivity, which would ultimately lead to higher wages in future. The capital stock was meant to be jointly owned and utilised by the people involved in the process. This system, therefore, would work best in a socialistic scenario. In a capitalistic setting, it would require forced socialisation of public resources.

Thus, disguised unemployment in agriculture or the rural economy can drive costless capital formation through utilisation of underemployed labour, which derives its consumption from existing agricultural sources. However, it is assumed here that the labourers do not increase their consumption levels as agricultural output is considered the same.

In conclusion, as stated in the book The Economics of Development and Planning, authored by M L Jhingan, it cannot be denied that the use of surplus labour as the source of capital formation “brings within a narrow time-horizon projects which were outside this horizon. It gives scale economies, enlarges land, capital and employment and raises productivities all round.”


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